US dollar retreat continue

Ukraine talks weigh on the US dollar

Currency markets had a volatile session overnight, with most of the majors trading in quite large ranges. The intraday volatility is a symptom of a market that is searching for a unifying theme and finding it difficult to nail one down. In the end, the US dollar continued its retreat, led by losses versus the euro, as the street continued to reprice Ukraine risks down with the FOMC out of the way. That saw the dollar index tumble 0.40% to 98.01, edging higher to 98.08 in pre-weekend trade. The dollar index traced out a double bottom at 97.70 overnight, and failure signals the retreat will continue.

EUR/USD rallied by 0.50% to 1.1090, easing to 1.1080 in quiet Asian trading. It traded as high as 1.1135 overnight and this area marks initial resistance, followed by 1.1200. It is now mid-range between long-term support at 1.0800, and longer-term resistance at 1.1400. With a divergence in monetary policy between the US and Europe, Europe’s energy vulnerabilities, and Ukraine uncertainty, sustaining these gains for long will be challenging I believe. I do acknowledge though, that given the week’s price action, its next short-term direction is a coin toss.

GBP/USD traded in a wide 150 point range overnight thanks to a dovish rate hike by the Bank of England. In the end, it settled almost unchanged at 1.3155, where it remains today. 1.3100 to 1.3200 should cover sterling for the rest of the day. Similarly, USD/JPY remains unchanged at 118.75 for the third day. USD/JPY showed zero reaction to an expectedly dovish BOJ policy announcement. as markets price in a soaring energy import bill, and a widening US/Japan rate differential. The cross remains on track for further gains to 120.00 and beyond.

As sentiment remains strong around a Ukraine deal, and with a hawkish FOMC not provoking a US dollar squeeze, AUD/USD rallied 1.10% to 0.7380, and NZD/USD rose 0.65% to 0.6880. Assuming the market holds its nerves over a possible Ukraine deal, a big if, then both AUD/USD and NZD/USD have more upside into next week.

Asian currencies also rallied overnight versus the greenback as sentiment remained steady, and with all the bad monetary news out of the way. China set a neutral fixing today, and Asian currencies are slightly weaker after two sessions of gains. It looks as though investors are trimming long Asia FX positions into the weekend. A quiet weekend from Eastern Europe gives room for the recovery to extend into early next week.

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